ANZ first to issue $1Billion in covered bonds. Other banks scramble to follow. Don't worry the government will cover your deposits -----famous last words. http://www.theaustralian.com.au/bus...vered-bond-issue/story-fn91wd6x-1226195010736
It's a worry. You can google the headline to get through to the full article. http://www.google.com.au/search?q=ANZ+first+with+covered+bond+issue
banks are only allowed to source 8% capital in the covered market, and since the senior unsecured market has pretty much frozen up for the past 6 months, this is one of the few way left for banks to raise funding without paying through the roof for it. Its covered by pools of mortgages btw..
It all depends on what 8% means. If the other assets of the banks are loans and mortgages rather than hard assets 8% can be sizable. Fanny and Freddy have $Trillions in assets if you count loans as assets. Pity they have no money..
8% of total assets, including home loans, commercial loans, credit cards and other assets. However, APRA will enforce rules to ensure the banks don't over extend themselves. Source: APS 121 Draft ( http://www.apra.gov.au/adi/Documents/Draft Prudential Standard APS 121 20111101 v1 3.pdf ) So if the property market gets crushed and suddenly ANZ's assets on the books dropped by 40% they would have to report to APRA and steps will be taken to ensure they clear off some of their covered bonds to remain below 8% of total assets. Also, as long as ANZ does not default on their repayments it shouldn't affect anybody but ANZ's shareholders and profits. Why couldn't this have been posted up before my exam on covered bonds/SPV and APS IRB risk management etc... would've made studying so much more interesting :lol:
8% capital mean 8% of the banks funding (laibility side of the balance sheet), which consists of: Deposits Covered Bonds Senior unsecured bonds Subordinated bonds Preference Shares/Perpetual bonds Ordinary shares Also the fact that covered bonds are secured by mortgages means that as long as ppl dont default en-masse, then all is good.. nothing to do with the prices of the underlying houses. And if there is a mass default on the morgages, the Covered bonds take precedence in payout to all other debt (except Deposits, which are Gov Guaranteed)
SMH says it's total assets not regulatory or economic capital or tier 1 cap etc so I don't think it's total capital but total assets. If it's merely 8% of total capital then I highly doubt they will be able to issue up to 160 billion dollars of covered bonds. I mean, our banks have 2 trillion in capital? what? Agree with the part of not defaulting, as long as not everybody defaults at once doesn't matter if house prices go up down or sideways, ANZ and other banks will have reserves for doubtful debts. Their profits might take a beating but they won't need a bailout.
Total assets = Total Liabilities + Equity They probably will not issue 160bio of covered this year, but over 10 years, I don't see why not. Many Canadian and Scandinavian banks have 10s of billions of covered bonds on issue, and their economied/populations aren't that much bigger than ours
Covered bonds are a fix for funding issues that aren't going to go away for quite a bit of time. a five year bond now would need to be rolled over at a really bad time I suspect. If housing price do continue to be under pressure the banks could be facing a double whammy down the track.
Never mind their exposure of 15 Trillion ("T") in derivatives. http://barnabyisright.com/resources-articles/tick-tick-tick-aussie-banks-15-trillion-time-bomb/ Its so funny how banks can convert an unsecured loans and mortgages into an asset. I would classify that as potential liabilities. By the way the Gvt cover on depositors is limited to $250,000 and what I find concerning is that in the event of a bank crash the government will not have the money to cover this. Have you forgotten we are already $200 Billion in the red. Also is the guarantee for the depositors direct or through the banks where covered bonds would have first call. If this does not encourage you to buy PM nothing will.
A loan/morgage written by a bank is an asset: It generates cashflow, and will (hopefully) be paid off at then end. Kinda like putting your money in a term deposit - you earn interest, and (hopefully) receive your money back at the end of the term. Deposits are guaranteed direct. For the government to have to cover every deposit in the country, we would be royally screwed that the AUD would be worthless anyway.. however, if one bank went under, then the Gov could quite easily cover the deposits - by issuing bonds at ridicuously low interest rates. And dont worry.. I have plent invested in PM.. just trying to explain the mechanics of bank debt - i trade this shit every day after all..
I get a warm and fuzzy feeling every time I think of of those property titles in the bank vault weighted down by the gold and silver bullion:lol:
I can't believe that the big 4 Australian Banks are going down the path of covered bonds..Like Qantas, I'll add them to my list of endangered businesses. Regards Errol 43
At the bus stop here in London there is a bank advert offering "1000 pounds in advance when you deposit 12000 pounds with us." with some fine print and a reference to something like a 3% rate. I suspect the fine print doesn't mention the strong possibility that your 12k will be worth about 6k when they give give you access to it at some future time, and the 1k in advance will have been swallowed up by some hook in the fine print, and the taxman will be after what's left of it. In the continuing absence of moral hazard, the banking sector is more and more showing that they should be tarred and feathered and run out of town. Parasites.
If you think government insurance is worth anything look at MF Global accounts that were insured ??? http://www.youtube.com/watch?feature=player_embedded&v=jp2rA5CU9Ic
Not quite - the difference between covered bonds and mortgage backed securities, is that if a loan in the covered pool defaults or matures, it has to be replaced with another loan, so that the cover pool is maintained And where would you like to keep your money/get a home loan/credit card etc? There is a need for banks, and not all bankers are the scum of the earth they are being made out to be right now.. that label should be reserved for a banks with initials G.S.
